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Spain's housing crisis will 'drag on for years'

Source: Reuters - Fri 5th Nov 2010

Housing prices in Spain could fall gradually for several more years, aggravating economic stagnation, while a massive property bubble slowly deflates.

Home prices have come down an average 13 percent since they peaked in 2008 before Spain plunged into recession. Since then scores of developers have gone broke, leaving tens of thousands of unsold houses and apartments in the hands of banks. Many factors continue to force down prices such as 20 percent unemployment, the glut of 1.4 million unsold and mostly new homes, and scarce credit from Spain's wary lenders.

However, other factors - an illiquid market, a real estate recovery in prime neighborhoods, low interest rates and stubborn sellers - bolster prices and prevent a brutal adjustment that might quickly reactivate the economy.

As a result, housing and construction, which contributed as much as 8 percent of gross domestic product during the decade-long boom, may for the long term account for only 4 percent of the economy.

"By 2012-2013 housing will not be a drag on economic growth but it won't be a big driver, so you have to ask what do we have to substitute," said Jose Carlos Diez, chief economist at Intermoney brokerage in Madrid.

Economists say Spain's growth could lag the euro area average for five years as it will take time for exports - such as cars, car parts and renewable energy technology - to replace construction in the economy.

Meanwhile, the stunted building sector will drag.

Such feeble growth will do little to reduce the euro zone's biggest unemployment total, ensuring households will continue to feel the impact of the crisis for a long while yet.

"It will take a few years to clear the housing overhang... Even if you assume home building stops altogether and home sales return to pre-crisis levels, it will take until 2012 to clear the oversupply" said Daniele Antonucci, an economist with Morgan Stanley in London.

In a Reuters poll experts forecast a 5 percent drop in Spanish housing prices this year and 4 percent in 2011.


Spain's economy would reactivate with a jolt if housing prices quickly shed another 20 percent, similar to what has happened in the United States and Ireland, says Fernando Encinar, co-founder of real estate Web site

"That would be an American solution. But as a country I don't think we're prepared for that. I think we're going to see a Germany style scenario, where prices came down little by little over 10 years," he said.

He said that unless the economy weakens even further, for now there are relatively few desperate sellers willing to take a loss, because more than 80 percent of Spaniards live in homes they own and 70 percent of those have paid off their mortgages.

Other experts forecast Spain's housing market will see a soft correction, similar to those in the United Kingdom or France, but dragged out longer due to oversupply.

At the height of the boom builders produced half a million homes a year (Spain has 46 million people), with foreigners fueling demand for Mediterranean coastal vacation homes. Then, banks were happy to loan to most comers.

But credit has dried up as Spanish banks - with 181 billion euros in potentially troubled exposure to real estate - demand extra collateral from buyers or provide loans only for the foreclosed properties on their books.


The central bank is squeezing private banks to increase provisions for property they've held for more than two years, which could force them to shed assets at lower prices.

Sales volume on the Spanish housing market could drop after Jan. 1 - exerting downward pressure on prices - when the government phases out a tax write-off on mortgages for some new home buyers.

Continued high unemployment as the government slashes spending next year to trim the budget deficit could also force more homeowners to sell and to accept lower prices.

Juan Fernandez-Aceytuno, general director of Sociedad de Tasacion, one of Spain's biggest property appraisers, sees housing prices continuing to decline by 5 percent to 6 percent a year, until family income and bank lending revive.

He points to the estimated one million unsold new homes still on the market, of which he said 10 percent are in the hands of banks.

Perversely, building has reactivated somewhat, and banks holding undeveloped lots - taken over from bankrupt developers - could take advantage of falling labor and materials prices to build at low cost, flooding the market with cheaper homes.


However, unemployment benefits and low interest rates are helping Spaniards meet their mortgage payments, preventing a steep plunge in home prices.

Spaniards are not given to moving to another part of the country for work and, under Spanish law, there is little incentive to walk away from your property. You will still owe the bank the money you borrowed.

Daniel Cienfuegos, a Madrid real estate agent, says his clients balk at bringing down over-optimistic asking prices.

"It's hard work. The huge majority of sellers we are working with are asking way too much, and we have to persuade them that they aren't getting any interest from buyers," Cienfuegos said.

Spain's housing data is considered unreliable because it comprises unrealistic asking prices rather than real transaction prices, and because appraisals are based on what Fernandez calls "a totally opaque market with few transactions."

But the data does show a steady trend toward a slowing fall in prices and transaction volume has stabilized at around half a million a year, down from a million a year during the boom.

Sellers may be stubborn, but some buyers are also patiently waiting for bargains.

"A lot of people don't want to come down on their price, their expectations are really high... But time is on my side," said 34-year-old Marina Lozano, who has been looking for six months for a bigger house for her growing family in Madrid.

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